Introduction
What should UK contractors consider when they think about when can I take dividends from my company? As a UK limited company contractor, you will likely take your income as a combination of salary and dividends. However, while you do your UK contracting work from day to day, limited company contractors will sometimes wonder about how often can I take dividends from my UK company. A dividend is a disbursement to shareholders from company profits. They will think about when is the right time and how often a disbursement can be paid. There is no correct answer here, and when you consider how often can I take dividends from my company (UK), many will choose to take these each month or each quarter.
Initial thoughts
First thoughts around when can I take dividends from my company
As a UK contractor professional, how often can I pay dividends from my contracting company? If you consider when can you take dividends, the time when you make these payments depends on your finances and your planned income levels. Therefore, let us now investigate how often can I take dividends from my company (UK) and what we should consider here.
Other articles
Before moving on, as a limited company contractor or business owner you should consider several aspects before pay a disbursement. These include:
- When can you pay yourself dividends (this article)?
- When dividends are illegal.
Secondary considerations
When can I take dividends from my company?
Let us now take a look at when can you take dividends. As part of this, we need to consider a couple of things. Your business can make a disbursement at a particular time in the tax year, which can help reduce your personal tax. However, when can you take dividends as a limited company contractor, it will depend on your overall taxable income in the current tax year.
You can also be confused about when a disbursement will be taxable. The answer here is the disbursement is taxable when it is `declared as being payable.’ Therefore, you can draw a dividend declaration showing the date the disbursement is payable.
Dividend declaration
The dividend declaration can be drawn up in a form called a dividend voucher. The date of this voucher is the date when the payment is taxable. You can also hold a directors’ meeting or board meeting and draw up some board meeting minutes that approve the disbursement.
What to bear in mind when you take a disbursement
In general, when we consider how often can I take dividends from my company (UK), the answer is you can do this any time you want. However, you need to:
- Ensure there is enough profit in your company to do this.
- Bear in mind how making the disbursement may affect your personal tax position.
Other thoughts when you take dividends from your company
When can I take dividends from my company -make a disbursement at end of tax year
It may be towards the end of a tax year, and you have decided that you do not want to make an extra disbursement. However, you may still have part of your tax allowances or basic rate tax band available. You can choose to declare a dividend payable straight away. Alternatively, you can also draw the cash from your business later, when you so desire.
It is best practice to ensure you use your tax allowances in the current tax year. It is also more tax efficient to do this rather than taking more in a future year when some income may be taxable at a higher tax rate.
Make sure there is enough profit to make the payment
It is key that a UK contractor limited company which makes disbursements has enough post-tax company profits before it pays the disbursement. The post-tax profit will include the profit for the current year. The profit is calculated by taking sales and deducting expenses and liabilities for any costs, equating to pre-tax profit. We deduct the Corporation Tax from the pre-tax profit, which gives the post-tax profit. We also need to add on any retained profit from the previous financial period.
Please see how much you can draw as dividend income, as this article explains how you can work this out.
The annual dividend allowance
The dividend system was changed on 6 April 2016. Each taxpayer now has an annual allowance, which is currently £2,000 in 2022/23. However, this is reducing to £1,000 in 2023/24 and £500 in 2024/25. Therefore, if you have enough funds in your business, you should make sure that you pay at least £1,000 in 2023/24 to use up your dividend allowance.
However, that the allowance falls inside the income level taxpayers are taxable on under basic rate tax. In 2022/23 and 2023/24, this is on gross annual income up to £50,270.
Tax bands, rates and further considerations
When can I take dividends from my company -tax on dividends
When we consider what tax you pay on your company disbursements, the amount you will pay depends on your other taxable income in the same tax year. However, income tax and national insurance contributions are payable on salaries while only tax is payable on disbursement income.
Dividend income is treated as the top slice of your income in a tax context. To explain, these are taxable after all other sources of income such as employment, rental profits, pension income, self-employment income, etc.
The UK tax bands and tax rates
The rates of tax that apply in 2022/23 and 2023/24 are:
| Income tax band | Thresholds 2022/23 | Thresholds 2023/24 | Dividend tax rate |
|---|---|---|---|
| Personal allowance | 0-12,570 | 0-12,570 | 0% |
| Basic rate taxpayers | 12,571 – 50,270 | 12,571 – 50,270 | 8.75% |
| Higher rate taxpayers | 50,27 1- 150,000 | 50,27 1- 125,140 | 33.75% |
| Additional rate taxpayers | 150,000 upwards | 125,141 upwards | 39.35% |
Further considerations
As part of the above, please bear in mind the following:
- The £12,570 shown above is your personal allowance.
- However, please remember that you will also have your annual dividend allowance of £2,000 in 2022/23 and £1,000 In 2023/24.
- Therefore, if you had no other taxable income, you could earn £12,570 + £2,000 – £14,570 in dividends before you pay tax in 2022/23. In 2023/24 this will be £12,570 + £1000 = £13,570.
- In all likelihood, though, you will probably have other income. This will probably be a salary; therefore, this will use up some, if not all, of your personal allowance.
- Therefore, besides receiving £2,000 or £1,000 worth of dividends tax-free, you might have some other tax-free dividends if you have any personal allowance left.
- The rest of your disbursements up to the higher rates tax level of £50,270 will be taxed at the basic rate of 8.75%.
- In terms of paying your tax on dividends over to HM Revenue & Customs, you will do this via your Self-Assessment tax return once per year.
Final thoughts
There are certain factors to consider for UK contractors when it comes to thinking about taking dividends from a UK company. In the main, this includes how often can I take dividends from my company (UK) and when can you take dividends.
It is best practice to make your dividends and salary payments separately from the company bank account. When you do this, it is evident in your business records and accounting system what any payments are in relation to.
If you combine the payments, this could present questions from HMRC later on. Therefore, it is best practice in your accounting records to show clearly which payments are for salary and dividends. This may then save you from having to answer unnecessary questions from HMRC at a later date.
Link to Contractor Advice UK group on LinkedIn